NETEASE (NTES) PLUNGED LOWER THURSDAY LAUNCHING OUR NOV 37 PUTS TO A QUICK FOUR-DAY TWENTY-ONE PERCENT PROFIT!

The beauty of option trading is it's never boring--some market ups and downs got us out of several positions this past week...

NETEASE (NTES) PLUNGED LOWER THURSDAY LAUNCHING OUR NOV 37 PUTS TO A QUICK FOUR-DAY TWENTY-ONE PERCENT PROFIT!

We also sold out of our IWM calls for close to a break-even and sold out of the second half of our GS debit spread for a loss after last week's first half gain.

In addition it looks like Harley (HOG) is rolling over and already added some nice value to our put position on Friday--any more downside and this put position will chalk-up another nice profit to the win column.

When Goldman rolls over along with the rest of the financials you have to wonder how much longer this rally can last. To help find out and locate some winners for this week let's take a good look at...

WHICH WAY THIS MARKET IS HEADED

The S&P-500 tested upside resistance at 1100 twice last week and then rolled over. The index formed a lower high and Friday's close was a lower low. Decliners were 10:1 over advancers (448:46) on the S&P Friday--a bearish sign.

The Nasdaq gave up 10 points on Friday despite the gains by Microsoft and the big $25 spike higher by Amazon. If the Nasdaq could not remain positive with those heavyweights posting big gains it gives you an idea how much selling was going on everywhere else. Decliners were 4:1 over advancers on the Nasdaq Friday. This index is looking like a big drop could happen anytime--rising wedges are usually very bearish patterns.

Another consideration is the Financials are considered the overall market leaders and that sector dropped -2% for the week in spite of positive comments from Capital One and American Express. Capital One (COF) rallied +7% after posting a surprise 14% increase in Q3 profits. COF did raise loan loss provisions but they were positive on the trend in consumer credit accounts. American Express (AXP) said earnings fell -21% but reported progress in cleaning up their accounts--loan loss provisions actually decreased at AXP.

There are reasons for investors to be concerned about the financial sector with seven more banks closed on Friday bringing the total to 106 for the year. Fortunately the banks closed on Friday were small with the estimated cost to the FDIC fund at a relatively modest $357 million.

The coming week we'll see another $123 billion worth of bond debt being sold at auction. With the interest rate on the 10-year note hovering at a six-week high just under 3.5% the cost of government borrowing is starting to move up. With a $1.5 trillion annual deficit growing to a $2 trillion the cost of money is eventually going to be a very big problem. Once these auctions start seeing a lack of bids it will drive rates higher--and those higher rates will draw a lot of money from the stock market. That may not happen in the next few weeks but it will happen

The next two weeks are filled with critical economic events including another FOMC meeting. The most critical report for next week is the first look at the Q3 GDP on Thursday. Expectations are for a gain of +3.2% compared to a drop of -0.74% in Q2. This higher Q3 expectation is already priced into the markets and a miss on expectations could have a very serious impact.

On Friday the GDP for the U.K. was released and showed a -0.4% drop instead of the 0.2% gain economists had expected. The European markets fell on the news and the British pound fell -1.5% against the dollar in early trading. The problem is the U.K. is basically a mirror of the USA. They have implemented many of the same stimulus programs as the U.S. and they are still in recession. This made analysts question their predictions for the USA and Thursday's Q3 GDP estimates--a big reason for the market weakness on Friday.

This week's economic reports are a build-up to for the next week's climax with the ISM, Fed meeting and Non-Farm Payrolls.

The earnings cycle is in full swing and we'll see the most earnings reports of any week in the next five days. However the quality of the earnings may begin to decline because the majority of the big cap blue chips have already reported.

We'll primarily see small tech and energy with COP, XOM and CVX leading the energy sector and on the tech side we have GLW, ADPT, AKAM, LVLT, FLEX and SYMC to name a few. We also get the inside scoop on the retail brokers Ameritrade and Etrade. After this week we'll be on the tail-end of earnings with all that bullish anticipation behind us.

So far in this earnings cycle 37% of the S&P has reported and 81% of those companies have beaten estimates by an average of 18%. That would be a pretty impressive number except that the majority of it came from additional cost cutting with some companies still announcing layoffs. Earnings for the entire S&P are only expected to be $14.79 per share for the quarter--well below the $23-$24 per share for Q3 in 2006/2007. It is also below the $15.96 actually reported in Q3 2008. Companies are beating estimates but estimates are still so low you could crawl over them.

Volume is starting to look bearish along with the actual price on the charts with the largest volume day in the past three weeks coming on Wednesday's decline at over 10 billion shares. Thursday's rally was decent at 9.2 billion but Friday's decline was also in the 9 billion range and continued the trend of higher volume on down days.

The major indexes are showing the kind of volatility that normally appears at market tops as investors become less committed and more cautious. Everybody wants the market to move higher but the big funds are already fully invested. It's beginning to appear that strong earnings surprises are opportunities for traders to exit rather than buy more. The question is...

HOW DO WE MAKE MONEY ON IT?

We've got two plays lined up this week--the first is a both ways play we can get into for practically nothing and the second is a bullish play on an index that rises when the rest of the market falls.

Our first play is a strangle where we can buy both sides for around .50 cents! And get this--earnings are coming out toward the end of this week so we won't have to wait long to collect what should be an excellent payday.

Our next play is really on the overall market and will rocket higher if the market continues to sell off--a very strong possibility as funds move to take their profits as earnings wind down.

We've got two very nice trades lined up on increasingly volatile market--so let's get going...
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